Mending Prasa will be a long haul

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12-02-2021
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Moneyweb
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Contraventions in supply chain management result in irregular expenditure of R28.6bn in FY2020.

The issues relating to financial mismanagement and tender irregularities at the Passenger Rail Agency of South Africa (Prasa) have been in the public eye for a number of years.

In 2015, then-Public Protector Thuli Madonsela released her report on the investigation into the various allegations concerning Prasa. These irregularities have been further probed by the Judicial Commission of Inquiry into Allegations of State Capture.

The minister of transport dissolved the Prasa board of control in December 2019, and a new board was appointed on October 21, 2020 for a period of three years.

This new board members now have to report on the financial year ended March 31, 2020 – which ended six months before their appointment.

In his statement accompanying the financial report, chair Leonard Ramatlakane referred to the unprecedented levels of theft and vandalism suffered by Prasa’s rail and infrastructure network.

Prasa will now focus on achieving stability in key management and skilled positions, strengthening good governance, ensuring the safety and security of operations and passengers, ensuring reliability and availability of rail transport, putting in place strong regional operations as centres of excellence, and consequence management.

This article summarises the main issues arising out of the financial report.

Investigations into irregularities

Numerous investigations are still in progress, including:

Those arising from the 2015 Public Protector report; Those being conducted by The Hawks (the Directorate for Priority Crime Investigation), which began in 2016 in terms of the Prevention and Combating of Corrupt Activities Act; Those relating to the contravention of the Competition Act; and Those relating to supply chain management irregularities identified and reported during the 2018/2019 audit. An agreement was signed on September 11 last year, in terms of which the Special Investigating Unit (SIU) would second resources to Prasa for six months to assist with the finalisation of the investigation into the material irregularity.

The SIU is currently investigating 27 matters. The Hawks are working on 23 matters, some of which have been referred to the National Prosecuting Authority’s Specialised Commercial Crimes Unit.

Internal investigations and disciplinary hearings are under way and three legal firms have been appointed to manage the ensuing disciplinary hearings.

Report of the Auditor-General (AG)

In a nutshell, the AG issued a disclaimer of opinion, supported by numerous reasons including insufficient appropriate audit evidence, not being able to verify property, plant and equipment (PPE), not being able to verify whether cash flows from investing were accurate and complete, inadequate impairment assessment performed for PPE, problems with the accounting for unspent conditional grants, incorrect accounting for prior period errors and adjustments, and a lack of governance records. The financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework or supported by full and proper records. Irregular expenditure, which amounted to R28.6 billion (2019: R27.3 billion), resulted mainly from non-compliance with supply chain management. Further findings include the lack of consequence management, the constant threat of pillaging and destruction of the rail infrastructure, major capital projects remain behind schedule, and irregularities with supply chain management. Total capital commitments in regard to “contracted but expenditure not yet provided for” amounted to R76.3 billion (2019: R71.1 billion). Total operational commitments in regard to services “contracted but expenditure not yet provided for” amounted to R16.6 billion (2019: R20.4 billion). The AG found that there was a lack of supporting audit evidence to substantiate R15.8 billion of the R16.6 billion.

Other significant numbers

Prasa has call deposits of R24 billion (2019: R18 billion). The financial statements do not indicate with whom these call deposits reside. However, they earn interest at an average rate of 5.9% (2019: 6.35%) per annum, and amounted to R1.5 billion for the year (2019: R1 billion). Prasa entered into an agreement with the Gibela Rail Transport Consortium in 2013 for the design, supply and manufacture of 600 new trains. Prepayments for 2020 amount to R8.3 billion (2019: R8.4 billion). Payments were made up front to Gibela for the construction of the assets. Once construction is complete and delivered, the amount is transferred to property, plant and equipment. The carrying value of property, plant and equipment that is taking “significantly longer to complete” is R3.9 billion (2019: R9.9 billion). The carrying value of property, plant and equipment where construction or development has been halted amounts to R2.1 billion (2019: R0.8 billion); R2 billion relates to a legal dispute. Unspent conditional grants for 2020 were R48.9 billion (2019: R45 billion). The AG could not confirm the accuracy of this amount. Contingent liabilities of R2.8 billion (2019: R3.2 billion) include the Siyangena contracts of R2.1 billion. In a judgment handed down on October 8, 2020 the North Gauteng High Court set aside all agreements between Prasa and Siyangena Technologies. Siyangena has appealed the Gauteng High Court decision. The receivable relating to Swifambo Rail Leasing (SRL) of R438.5 million (2019: R459.8 million) was “impaired to the current estimated potential recoverable value in the previous financial year”. This amount is likely to change. Prasa entered into a contractual agreement with SRL in 2013. Thirteen locomotives were delivered to Prasa during the 2014/15 and 2015/16 financial years. No locomotives were delivered subsequently. A forensic investigation revealed irregularities. The high court set aside the contract, and this decision was upheld by the Supreme Court of Appeal. The Constitutional Court dismissed Swifambo’s application for leave to appeal in 2019. There are many legal challenges ahead. Ramatlakane is confident that Prasa is “too significant to fail”.

Unfortunately, this is the refrain from all of the state-owned entities that have been battered by corruption and state capture.